Section 153C Valid but Addition Fails: No Incriminating Material = No Deemed Dividend

DCIT Vs Arun Kumar Pillai (ITAT Bangalore)

The ITAT Bangalore delivered a split ruling—upholding validity of proceedings u/s 153C, but deleting the entire addition of deemed dividend due to absence of incriminating material.

The case arose from a search on Skanray group, where documents led the AO to initiate proceedings u/s 153C against the assessee and tax ₹21.64 crore as deemed dividend u/s 2(22)(e) based on loans from group companies.

On the legal issue, the Tribunal noted that earlier reliance on Karnataka HC ruling in Sunil Kumar Sharma (favouring 153A over 153C) no longer holds good in light of a later Karnataka HC decision (C.R. Ram Mohan Raja). Accordingly, initiation u/s 153C was held valid.

However, on merits, the Tribunal found that:

• The assessment years were completed/unabated assessments at the time of search
• The alleged deemed dividend transactions were already disclosed in audited financial statements
• No incriminating material was found during search linking to undisclosed income

Relying on the Supreme Court ruling in Abhisar Buildwell, the Tribunal held that no addition can be made in completed assessments without incriminating material.

Accordingly, while jurisdiction u/s 153C was upheld, the addition u/s 2(22)(e) was deleted in full, resulting in partial relief to Revenue but substantive victory for assessee.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This appeal is filed by The Deputy Commissioner Of Income Tax Central Circle -2(3), Bangalore [ the Id. AO ] in the case of ARUN KUMAR PILLAI [The Revenue / Respondent] for the assessment years 2015-16 to 2017-18 against the common order passed by the Ld. CIT(Appeals)-15, Bengaluru [Id. CIT(A)] dated 24.1.2025 wherein the appeal filed by the assessee against the assessment order passed u/s. 153C of the Income Tax Act, 1961 [the Act] on 9.9.2021 was allowed following the decision of the Coordinate Bench in assessee’s own case in ITA No.872/Bang/2024 dated 30.8.2024 for AY 2014-15. Therefore, the order of the Id. CIT(A) is contested before us.

2. The facts of the case indicate that the assessee was subject to a search under Section 132 of the Act in connection with M/s. Skanray Technology Pvt. Ltd., which included a search at the residence of the assessee on 6 November 2019. For Assessment Year 2015-16, the assessee filed a return of income under Section 139(1) on 31 October 2015 declaring a total income of Rs. 8,06,57,320. This return was selected for scrutiny and resulted in an assessment order under Section 143(3) on 28 November 2017 at the same amount.

3. During the survey proceedings, several group entities were also covered under Section 133A of the Act. Various incriminating documents, as recorded in the Panchanama dated 7 November 2019 and 21 November 2019, were found and seized during the search. These documents, identified as belonging to the assessee, surfaced in connection with the search on Skanray Technology Pvt. Ltd. The Assessing Officer (AO), being the same AO for Skanray Technology Pvt. Ltd., determined that the documents pertained to the assessee. Consequently, a notice under Section 153C of the Act was issued on 18 February 2021.

4. The assessee reiterated the same return, which led to the passing of an assessment order under Section 153C on 9 September 2021. An addition was made under the provisions of Section 2(22)(e) of the Act as deemed dividend. It was noted from the books of account impounded during the search that the Agnus group of companies—namely, M/s Chayadeep Properties Private Limited (CPPL), M/s Agnus Holdings Private Limited (AHPL), and M/s Karuna Ventures Private Limited (KVPL)—had advanced loans to various related entities, including shareholders and concerns where shareholders have substantial interest. The learned AO was therefore of the view that such loans or advances should be treated as deemed dividends in the hands of the shareholders to the extent that the company had accumulated profits. The AO detailed these findings for each relevant company and shareholder and subsequently issued a show cause notice to the assessee.

5. The assessee contended that the income in question is not taxable in the hands of the assessee under section 2(22)(e) of the Act. Reference was made to the Notes on Accounts of various companies to support the claim that section 186(7) does not apply to the company. The Assessing Officer (AO), after reviewing the primary objectives of the company, rejected all arguments presented by the assessee and included an amount of Rs. 2,84,47,585 as deemed dividend in relation to loans received from CPPL, and Rs. 18,80,51,424 in relation to loans from AHPL. Consequently, the AO determined that a total of Rs. 21,64,99,009 should be treated as deemed dividend and taxed accordingly. The assessment order under section 153C of the Act was thus finalized with a total assessed income of Rs. 30,00,72,540.

6. The assessee filed an appeal before the learned CIT(A), raising multiple objections. It was contended that the advances were extended in the ordinary course of business, as the entities involved are finance companies. Furthermore, the Memorandum of Association of each respective company demonstrates that granting advances constitutes a substantial part of their business activities. Accordingly, it was argued that no amount should be deemed as dividend chargeable to tax in the hands of the assessee.

7. During the proceedings before the learned CIT(A), it was noted that the assessee’s appeal for AY 2014-15, involving identical facts and grounds, had similarly been considered by both the Id. CIT(A) and subsequently by the ITAT, Bangalore.

8. In its order dated 30 August 2024 in ITA No. 872/Bang/2024 for AY 2014­15, the ITAT Bangalore, at paragraph No. 7, held that the year under consideration is unabated/completed assessment year which was initiated in consequence to search proceedings carried out in the case of Skanray Technologies Private Limited. The coordinate bench further held that it has been settled by various Honourable High Court’s including the jurisdictional High Court that the completed assessment cannot be disturbed in absence of any incriminating material/documents where the assessment / reassessment can be disturbed with respect to abated assessment years. The coordinate bench referred to the decision of the Honourable jurisdictional High Court in case of CIT versus Lancy construction 237 Taxman 728. Further the coordinate bench noted that the proceedings under section 153C of the Act have been initiated from the financial statements of various companies of the assessee and his associate concern has received loan from those companies which are deemed divided under section 2 (22) (e) of the act. The coordinate bench referred to paragraph No. 10.1 of the order of the learned assessing officer where these facts are recorded. The coordinate bench further looked at the panchnama in the case of Skanray Technologies Private Limited and held that there was no mention of any incriminating documents suggesting any undisclosed income of the assessee in the form of deemed dividend as provided under section 2 (22) (e) of the act. Thus, in paragraph No. 7.2 of the order of the coordinate bench held that there was no material of incriminating nature found during the search proceedings regarding the impugned addition. It further noted that all transactions were duly disclosed by the respective companies in their respective audited financial statements. The learned assessing officer also did not refer to any incriminating material found during search in this regard in his assessment order which would have been made basis for the addition in the assessment in the hence of the assessee. Thereafter, the coordinate bench referred to the decision of the honourable Supreme Court in case of Principal Commissioner Of Income Tax, Central — 3 Versus Abhisar Buildwell Private Limited (2023) 149 taxmann.com 399 (SC), decision of the honourable Gujarat High Court in case of Somya construction and in paragraph No. 7.8 held that there cannot be any addition to the total income of the assessee of the regular items as made by the learned assessing officer on the present case. Thus, the ground of appeal raised by the assessee was allowed. Thus, the coordinate bench held that there is no incriminating material found during search which could be used for disturbing the concluded assessment.

9. In paragraph 8, It held that the assessee qualifies as a searched person rather than a person other than the searched person. Consequently, the assessment proceedings should have been initiated against the assessee under section 153A of the Act, as supported by the decision of the Hon’ble Karnataka High Court in DCIT v. Sunil Kumar Sharma [2024] 159 com 179 [Karn]. Therefore, the assessment proceedings under section 153C read with section 143(3) of the Act were quashed.

10. The learned CIT(A) noted that the Coordinate Bench had previously allowed the assessee’s appeal by setting aside the assessment order issued under section 153C of the Act, determining instead that the assessment should have been conducted under section 153A, consistent with the Coordinate Bench’s ruling in the assessee’s case for AY 2014-15. Consequently, the CIT(A) granted relief to the assessee for all three relevant assessment years. Thus the Id. AO is in appeals.

11. The learned AO has raised the following grounds of appeal: —

i. On the facts and in the circumstances of the case and in law, the learned CIT — A has erred in holding that the panchnama showing the warrant of authorization issued in the name of M/s Skanray technologies Private Limited can be considered a warrant issued in the case of Arun Kumar Pillai, merely because the name of Arun Kumar Pillai appears in the address details of the premises searched, thereby directing the assessment under section 153A instead of section 153C, contrary to the statutory mandate and established principles governing search and seizure under the income tax act.

ii. On the facts and in the circumstances of the case and in law the learned CIT — A has erred in holding that no material of incriminating nature was found, ignoring the documents seized during the search action which revealed shareholding of the assessee in various companies and such information were not disclosed by the assessee in his income tax return filed for the relevant assessment year

iii. on the facts and in the circumstances of the case and in law the learned CIT — A has erred in holding that the addition under section 2 (22) (a) of the income tax act, 1960 one, despite the presence of seized material substantiating the nature of deemed dividend transaction and concluding that the addition was solely based on financial statements already submitted by the assessee.

12. The Id. CIT(DR) vehemently supported the order of the Id. AO and submitted that the proceedings u/s. 153C of the Act has been correctly initiated in the case of this assessee. Further he relied on the order of the learned assessing officer with respect to the incriminating material found during search.

13. The Id. AR, Shri Padam Chand Khincha, CA vehemently submitted that assessee is a searched person as his residence was searched. He referred to the decision of the Coordinate Bench for AY 2014-15 and submitted that the Coordinate Bench has clearly held that proceedings u/s. 153C of the Act initiated by the AO is devoid of any merit considering the decision of the Hon’ble Karnataka High Court in the case of DCIT Sunil Kumar Sharma (supra) against which the SLP filed by the Revenue is also dismissed. He further stated that there is one more reason given by the Coordinate Bench in deciding the issue in favour of the assessee holding that there is no incriminating material found during search and therefore no addition could have been made in the case of completed assessment. It was submitted that this issue is covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Abhisar Buildwell P. Ltd., therefore he submitted that without going into the merits of the case the assessment order passed in the case of the assessee by the Id. AO u/s. 153C of the Act is not sustainable in law for the reason that action should have been initiated u/s. 153A of the Act and, even otherwise there is no incriminating material found during the course of search.

14. We have carefully considered the rival contentions and perused the orders of the Id. lower authorities. Looking at the fact that the Coordinate Bench has in assessee’s own case for AY 2014-15 has held that there is no incriminating material found during the course of the search and therefore the decision of Hon’ble Supreme Court in the case of Principal Commissioner of Income-tax, Central-3 vs. Abhisar Buildwell (P.) Ltd. [2023] 149 com 399 (SC)/[2023] 293 Taxman 141 (SC)/[2023] 454 ITR 212 (SC)[24-04-2023] applies to the facts of the case. For making assessment u/s. 153A of the Act, the completed assessments are required to be disturbed only when there is incriminating material found during search. This is the mandate of the Hon’ble Supreme Court in the case of Abhisar Buildwell P. Ltd. [Supra].

15. Before us the assessment year 2015 — 16, 2016 — 17 and 2017 — 18 were also part of concluded assessments in view of the date of search under section 132 of the Act is 6 November 2019. Further the addition is made with respect to the deemed dividend and the coordinate bench has categorically held that when the details of the loan given by the various group companies to the assessee or his concern are already disclosed in the balance sheet, it cannot be said that same were not disclosed earlier before the assessing officer. It was held that these are disclosed material already in the audited accounts.

16. As there is absence of incriminating material found during the course of search, as held by the Coordinate Bench in assessee’s own case for AY 2014-15, respectfully following the same, we also hold that in the absence of incriminating material, the addition could not have been made even if it would have been made u/s. 153A of the Act. No distinguishing feature was pointed out by the Id. DR before us. It was also not pointed out before us that the decision of the Coordinate Bench is challenged before the Hon’ble High Court. Therefore, we are dutybound to follow the decision of the Coordinate Bench in assessee’s own case for AY 2014-15.

17. Therefore, respectfully following the decision of the Coordinate Bench in assessee’s own case for AY 2014-15, we also hold that the assessment order passed under the provisions of section 153C of the Act in the hands of the assessee for AYs 2015-16 to 2017-18 is not sustainable in law in absence of incriminating material found during the course of search. Accordingly ground No. 2 and 3 of the appeal of the learned assessing officer are dismissed.

18. Ground no 1 of the appeal is the second reason for quashing the assessment order by the coordinate bench in case of assessee for AY 2014­15 , the coordinate bench has held that that the premises of the assessee was also subjected to such proceedings carried out in case of Skanray technologies Private Limited and therefore in case of the assessee the provisions of section 153A of the Act were applicable and where the addition is made by the learned assessing officer under section 153C of the Act, the assessment orders were passed. Same is based on the decision of the honourable Karnataka High Court in case of Deputy Commissioner of income tax versus Sunil Kumar Sharma (2024) 159 com 179 (Karnataka). We find that the above decision of the honourable Karnataka High Court has been reversed by the decision of the honourable Karnataka High Court in case of C R Ram Mohan Raja (TS-596 — SC — 2026 (Karnataka)) as the decision rendered by the honourable Karnataka High Court in case of Sunil Kumar Sharma [ supra] did not consider the scheme of section 132 or section 153A or 153C in that prospective and further it failed to consider the earlier judicial precedents of C Ramiah Reddy and Associated Mining Company. Therefore, the honourable Karnataka High Court opined that Sunil Kumar Sharma decisions cannot be regarded as laying down the correct binding precedent on this issue. Accordingly, we do not find any infirmity in the order passed by the learned assessing officer under section 153C of the Act. Thus, the order of the coordinate bench in assessee’s own case for assessment year 2014 — 15 in ITA No. 872/Bangalore/2024 dated 30 August 2024 does not hold the field in view of the decision of the honourable Karnataka High Court. Accordingly ground No. 1 of the appeal of the learned assessing officer is allowed.

19. Thus, the assessment order passed by the learned assessing officer under section 153C of the Act are valid in view of the decision of the honourable Karnataka High Court in case of CRR Mohan Raja (supra) however the addition of deemed dividend made under section 2(22) (e) of the Act are deserves to be deleted in view of the decision of the coordinate bench in assessee’s own case for assessment year 2014 — 15.

20. In the result, appeals filed by the Revenue for the all the 3 years having identical facts are partly allowed.

Order pronounced in the open court on 30th April 2026.